ITL Metro, the competitive local exchange division of international telecom, wanted to get into the lucrative central office exchange business. No problem  just scrape up a spare $10 million to $20 million to purchase a Class 5 switch and they'd be on their way to bundling lucrative voice and data services.

But ITL Metro Chief Executive Joel Eisenberg discovered a cheaper alternative with heavy revenue-generating potential in softswitches manufactured by BroadSoft. The Gaithersburg, Md., company is one of a growing number of firms developing softswitches that include central office functions.

Softswitches are software solutions used to control hardware gateways. They operate over any broadband connection and allow competitive and incumbent carriers and other service providers to route voice and data using Internet Protocol. Souped-up softswitches, known as virtual central offices, not only allow providers to route voice calls over IP networks, but to sell lucrative add-on services such as call forwarding and voice messaging.

Circuit-switched phone calls typically pass through a local switch, a tandem switch and a long-distance switch. A carrier or service provider would have to be located within the switch serving area in order to operate, and switches would have to be housed in a central office. Softswitches remove the geographic constraints, routing calls to the nearest IP backbone point of presence or to the Internet.

"It's leveraging IP as the glue. It will be able to consolidate these networks and make a physical central office redundant because it's putting intelligence closer to the user. You can put [a virtual central office] anywhere on the network," says Maciej Kranz, manager of marketing at Cisco Systems' desktop switching unit.

A company can own one softswitch and 10 to 15 voice gateways and be able to access the entire country. Gone is the need for a central office. Also gone are high prices. BroadSoft's BroadWorks softswitch costs $300,000 to $1 million, depending on the number of users.

Softswitches and virtual central offices offer more than just inexpensive technology. For exchange carriers and service providers, virtual central office software can be a much-needed moneymaker.
As connectivity, transport and basic phone services increasingly acquire commodity status, smaller providers need to compete with bundled services offered by companies such as AT&T Broadband, Sprint and WorldCom. In today's telecommunications world, the money is in the add-ons.

According to Boston-based Aberdeen Group, a computer and communications consulting company, Mpower Communications, a competitive carrier that bundles local voice services, long-distance service, shared Web hosting and high-speed Internet access over the same Digital Subscriber Line, sees revenue of at least $450 per line. By contrast, the nation's leading competitive data carrier, Covad Communications, makes an average of $79 per DSL, "making for a difficult business in the long term, given the expense of its national DSL rollout," Aberdeen's report says.

Susan Davis, director of product management at Lucent Technologies, notes that competitive carriers "based business plans on long-distance or voice-over-IP services. The real challenge is: 'How do I make money with this?'"

Other telecom manufacturers are taking the softswitch's added-on services concept even further.

Last month, NexTone Communications launched iVANi, a virtual central office switch that connects voice and private branch exchange services from a company's headquarters to its remote offices. It also allows telecommuters to make and receive calls via DSL or cable modem as if they were connected to the corporate PBX.

IVANi has a "follow-me service" where, using a computer, personal digital assistant (PDA) or telephone, an employee can press "1" to indicate he's at home, "2" to show he's at the office, "3" to indicate he's on the road and so on. The virtual central office software automatically switches all calls to a single number and stores messages if the user is unavailable.

"Prior to this, you had to use the phone, with only 12 keys. It's a very archaic interface," says Dan Dearing, vice president of marketing at NexTone. "Now it's just a simple point and click on a PC or PDA."

IVANi, unlike some other virtual central offices, is geared toward independent service providers rather than competitive and incumbent carriers. Some industry observers believe service providers and competitive carriers will be the first to embrace virtual central officeechnology, followed by the regional Bells. One reason for this is that incumbent carriers already own Class 5 switches, and therefore have less incentive to buy softswitches.

"From an ILEC [incumbent local exchange carrier] perspective, many are doing the same thing [softswitches do]," Davis says. "CLECs [competitive local exchange carriers] are more likely to take these solutions and create a business."

Davis notes that Class 5 switch replacement isn't as easy as it seems. Class 5 switches offer services such as Enhanced-911 and wiretapping that are not only government regulated, but also unable to be replaced by a softswitch. "There's a tremendous amount of hype in the market about Class 5 replacement. Most of it is totally wrong," she says.

Scott Wharton, vice president of marketing at BroadSoft, says softswitches offer lower entry barriers for providers selling IP bundled services. "A new phone company can build radically different networks. They can immediately become a nationwide provider. Level 3 [Communications], MCI [WorldCom] can create huge megahubs, and the smaller service providers don't have to have a backbone. Their server could be in Virginia, and from one location, they can serve the entire world," he says. "It becomes more of a marketing exercise than a hoe-and-shovel exercise."

Aberdeen believes that voice wholesale service providers, such as Level 3, and Internet telephony service providers will begin to partner with Internet service providers and other carriers looking to enter the local voice business. Aberdeen envisions ISPs offering local dial tones as early as 2003.
But softswitches and virtual central offices have applications far beyond that, industry experts believe.

"Ultimately, it is the brains of the next-generation network," Lucent's Davis says. "It's a religious argument" between the "IP bigots" and the incumbent carriers as to whether data or telephony will triumph, she says. "Only one will be the future. The industry seems to feel ultimately, IP will win out. Traffic will be data-based rather than voice-based."

Davis says softswitches won't replace the public switched telephone network for at least a decade, but in two to three years, she envisions the routine ability to "route calls from any type of network  Internet, phone, wireless  into multitudes of end points with one network in the middle."

Cisco's Kranz says virtual central offices will create a "new breed of CLEC companies over the next three years." He projects that within the next 18 months, there will be a groundswell of competitive and incumbent carriers seriously interested in virtual central offices. "I almost think of it as the next Internet revolution, with a brand new set of services. [We'll finally see] video-on-demand, interactive TV, HDTV [high-definition television], where you would have to have a converged network, which is a virtual central office," he says.

Softswitches and virtual central offices will allow a migration away from DSL and onto an Ethernet and IP structure, Kranz believes. They will also offer more localized access from hotels and public spaces, he says.

NexTone's Dearing says his company anticipates a midyear launch of a virtual central office married to a teleconferencing server, allowing real-time teleconferencing.

Softswitches also are programmable after installation, Davis says, so providers don't have to rely on the vendor for changes.

With the growing interest in softswitches and virtual central offices, it's no surprise that the telecom giants are already on board. Lucent and Nortel Networks were early adopters, meaning they launched product two years ago. Cisco has virtual central office technology in the works. Some smaller companies have developed softswitches, but many are used chiefly for long-distance call routing.

"Softswitch is a very broad term," Davis notes. Basically, softswitches give the user the ability to offer new services more quickly, she says. "No one's saying, 'Here's the one application that's going to be the killer and make lots of money for lots of people.'"

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